COMMISSION STAFF WORKING DOCUMENT Country Report Malta 2015 {COM(2015) 85 final} This document is a European Commission staff working document . It does not constitute the official position of the Commission, nor does it prejudge any such position.
Date: 2015-02-26
Institutions: European Commission
Subjects: Malta, competitiveness, economic growth, educational system, loss, poverty, social-security benefit, structural adjustment, tax avoidance, working conditions













EUR-Lex - 52015SC0037 - EN











|



52015SC0037

COMMISSION STAFF WORKING DOCUMENT Country Report Malta 2015  {COM(2015) 85 final}     This document is a European Commission staff working document . It does not constitute the official position of the Commission, nor does it prejudge any such position. /* SWD/2015/0037 final */









Executive summary  1
1.       Scene
setter: Economic situation and outlook  3
2.       Structural
issues 11
2.1.   Fiscal
responsibility  13
2.2.   Resource
efficiency  19
2.3.   Business
environment 23
2.4.   Labour
market, social policies and education  27
AA.   Overview
Table  34
AB.   Standard
Tables 38
LIST OF Tables
1.1.     MIP
scoreboard indicators 8
1.2.     Key
economic, financial and social indicators - Malta   9
2.2.1.  External costs
of transport in Malta, 2012  19
AB.1.  Macroeconomic
indicators 35
AB.2.  Financial
market indicators 36
AB.3.  Taxation
indicators 37
AB.4.  Labour market
indicators 38
AB.5.  Product market
performance and policy indicators 39
AB.6.  Social
indicators 40
AB.7.  Green growth  41
LIST OF Graphs
1.1.     External
and domestic demand: contributions to GDP growth  3
1.2.     Growth
decomposition  3
1.3.     Investment
levels in selected countries 4
1.4.     Price
inflation in Malta   4
1.5.     Total
factor productivity evolution, total economy  5
1.6.     Geographical
and sectorial composition of nominal (USD) rate of change of exports of goods 5
1.7.     Global
competitiveness index, EU countries 6
1.8.     Deficit,
total revenue and expenditure (% of GDP) 6
1.9.     Banking
sector exposure to Maltese residents 7
2.1.1.  Electronic
payments per capita (2013) 11
2.1.2.  Taxes by
function in % of GDP for the EU and Malta (2012) 12
2.1.3.  Gross
government debt as % of GDP  14
2.1.4.  Total
dependency ratio ((0-14 plus 65+)/(15-64)) 14
2.2.1.  Energy intensity
of the economy  17
2.2.2.  The
inefficiencies of Malta's electricity system, 2013  17
2.2.3.  Ratio of
average speed to free-flow speed (roads with free-flow speed<=50km/h) 19
2.3.1.  Distance to
euro-area average (frontier = 100) 21
2.3.2.  The most problematic
factors for doing business (% of responses) 21
2.3.3.  Spread of
corporate interest rates in Malta and the euro area   23
2.4.1.  Main labour
market indicators 25
2.4.2.  Trends in
total activity rates in selected countries 25
2.4.3.  Female
activity rates by age group, 2003-2013  26
2.4.4.  Inactivity
traps for low-wage earners, % of gross earnings, 2013  27
2.4.5.  Poverty
indicators, % of total population  28
2.4.6.  Trends in the
rate of early school leaving, %   29
LIST OF Boxes
1.1.     Economic surveillance process. 7
LIST OF Maps
No table of contents
entries found.
In 2014, the economy and the labour
market continued to perform well and the outlook for 2015-16 is favourable. Strong labour market fundamentals, with unemployment dropping below
6 %, recovering investment and an accommodative fiscal stance are
projected to have resulted in real GDP growth of 3.3 % in 2014. Despite
the challenging external environment and the high import-intensiveness of
domestic demand, Malta’s exports continued to outpace imports and the net
external position is expected to have improved over the past year. Economic and
employment growth are projected to continue to outpace the euro area average in
2015-16. 
This Country Report assesses Malta’s
economy against the background of the Commission’s Annual Growth Survey which
recommends three main pillars for the EU’s economic and social policy in 2015:
investment, structural reforms and fiscal responsibility. In line with the
Investment Plan for Europe, it also explores ways to maximise the impact of
public resources and unlock private investment. The main observations and
findings of the analysis are as follows:
·        
Despite a lower budget deficit, the sustainability
of public finances remains a challenge. While Malta
does not appear to face sustainability risks in the short term, these risks
increase in the medium and long term due to the budgetary impact of population
ageing. The high level of contingent liabilities presents an additional
challenge. Insufficient tax compliance and instances of tax evasion are
long-term challenges that distort the tax system and hinder revenue collection.

·        
Over the past years, labour market
participation of women and, to a lesser extent, older workers has improved but
remains still considerably below EU average. Care obligations, benefit design and insufficient flexible-work
arrangements are key obstacles. Malta is currently
designing and implementing a number of measures to increase the participation
of women in the labour market. Policy efforts have also been dedicated to increasing the employment rate of older workers, focusing on
increasing the effective retirement age and enabling workers to continue
working beyond the statutory pensionable age.
Shortcomings in the education system contribute to the low skills levels in the
population.
·        
To improve the energy security of supply and
environmental performance, the authorities have focused efforts on reforming
the energy sector to diversify the energy mix. These
measures are expected to bring an end to oil dependency of the electricity
sector by 2016, although import dependency will remain high (for gas and
electricity). The electricity generation system is also expected to become less
carbon-intensive. As regards transport, although the public bus transport
system has been privatised in an effort to promote a shift from individual to
collective transport, the external costs caused by road traffic remain a
challenge.
·        
Despite improvements, Malta’s competitiveness
continues to be hampered by structural challenges in the business environment
and the innovation framework. The length of public
procurement procedures has been reduced considerably but still remains somewhat
above the average for the EU. Malta’s knowledge-driven growth potential as a
very small open economy has not yet been fully exploited and the reform of the
judiciary has yet to adequately tackle inefficiencies in the system. 
·        
Investment has been muted, despite the favourable
economic performance. Limited capital accumulation
to some extent reflected the changing structure of the Maltese economy towards
less capital-intensive service activities. However, the analysis also pointed
to a number of structural weaknesses that hinder private investment, such as
difficulties in the access to finance and inefficiencies in the business
environment also related to shortcomings in the energy and transport sectors. Investment
is projected to rebound in the medium-term, although it is unlikely to reach
its pre-crisis levels.
Overall, Malta has made some progress on
addressing the Country-Specific Recommendations issued by the Council in 2014. Some progress was made on improving the participation of women in
the labour market and improving the quality of public finances. Progress was
made on the fiscal framework reform, with the adoption of the Fiscal
Responsibility Act and the appointment of the members of the Fiscal Council,
but the concrete impact of the new set-up will take time to materialise. Some
progress was also made on reducing reliance on imported oil, improving the
links between the education system and the labour market, improving
alternatives to debt financing for companies and improving the sustainability
of the healthcare system. However, measures to reform the pension system to
ensure its long-term sustainability are still lacking.
This Country Report reveals the policy
challenges stemming from the analysis, namely:
·        
Challenges remain with regard to the quality
and the sustainability of public finances. The
tangible impacts of ongoing measures to improve tax compliance and fight tax
evasion are not yet clear and their pace of is slow, notably on the merger of
tax departments. Plans to examine possibilities to promote electronic payment
systems are encouraging, but are still at an exploratory stage. Finally, long-term
debt sustainability remains a challenge in view of the progress registered so
far on the reform of the pension system and implementation of the healthcare
reform .
·        
Resource efficiency in the economy is
hampered by weaknesses in the energy and transport systems. The reform of energy system is in the process of implementation and
the tangible benefits it could bring have yet to materialise. In the absence of
more focused efforts on boosting domestic production of renewable energy and
raising energy efficiency, however, Malta’s energy import dependency will
continue. Tackling road transport congestion also continues to be a challenge.
·        
Despite some policy measures in this area,
structural features continue to hinder the friendliness of the business
environment. A burdensome administration, slow
public procurement proceedings, and an inefficient judiciary continue to
represent challenges to Malta’s attractiveness for foreign investors. A modest
framework for research and innovation and difficult access to finance,
particularly non-debt financing, add to the scope of the challenge.
·        
Labour market participation still represents
a sizeable untapped potential for the domestic economy. Labour market activity remains particularly low among women and
older workers, reflecting not yet sufficient policy action in the areas of
elderly care, reconciliation of work and family life and education and
training, which are seen as key inhibiting factors.
Growth, inflation and unemployment
Economic growth is projected to remain
robust, supported by strong domestic demand. The
Maltese economy is estimated to have expanded by 3.3 % in annual terms
over 2014 and is expected to continue expanding at roughly the same rate over
2015-16 (see Graph 1.1). The main driver for growth is expected
to be domestic demand, supported by growing disposable income of households,
also reflecting the reduction of electricity tariffs, and investment in the
large energy projects. Overall, average real GDP growth over 2014-16 is
projected to reach the average for 2005-8.
 Graph 1.1:     External and domestic demand: contributions to GDP growth 
 Source: European Commission 
Labour market gains have been the main
driver for growth in recent years. Starting from a
low level in the middle of the previous decade, labour-market participation and
employment rates in Malta have been much more dynamic than in the rest of the
euro area. This mainly reflected higher labour-market activity, in particular
by women, as well as favourable demographic developments, namely a higher
increase in the working-age population also on the back of migration flows. The
quality of human capital also improved over this period, as evidenced by the
significant rise in tertiary education attainment, although this development is
also starting from a very low base level (see Section 2.4 for a further
discussion of labour-market and education and training issues). The economy has
been able to fully absorb the increase in supply and the unemployment rate
recovered to its pre-crisis low of 6 %, after reaching 6.9 % in
2009-10.
 Graph 1.2:     Growth decomposition 
 Source: European Commission, own calculations 
At the same time, investment stagnated. After being a prominent driver for growth in the first half of the
past decade, capital deepening stagnated, particularly after the global
financial crisis. This stagnation was driven by a pronounced slowdown in the
construction sector, with housing investment declining particularly strongly, while
equipment investment remained relatively stable. To some extent, the investment
dynamics also reflect the restructuring of the economy towards more
labour-intensive service activities as well as, to some extent, firms'
preference to use their funds to rather retain personnel. As a result, the
capital intensity of the Maltese economy is among the lowest in the EU. The
decline in investment activity was more pronounced in the private sector, where
it has fallen considerably below the euro-area average (see Graph 1.3). Investment is projected to rebound in
the medium-term, although it is unlikely to reach its pre-crisis levels.
 Graph 1.3:     Investment levels in selected countries 
 EU-4 consists of EE, CY, LV and LU Source: European Commission 
Price inflation is projected to remain
moderate in historical perspective, but still higher than the average in the
euro area. Deflationary pressures present across
Europe are projected to be less pronounced in Malta. HICP inflation is forecast
to remain below the long-term average at just above 1 %, despite the
expiration of the base effect from the lowering of electricity tariffs for
households. The normalisation of commodity price developments on global markets
in 2016 is projected to result in consumer price inflation returning to its
long-term average of around 2 %. 
 Graph 1.4:     Price inflation in Malta 
 Source: European Commission 
Productivity dynamics
Significant gains in employment have
masked a sluggish productivity performance. Total
factor productivity has stagnated since the beginning of the past decade,
lagging behind the average for the EU and performing significantly below the
average for the Member States that joined the EU in 2004 (see Graph 1.5). Indeed labour productivity in Malta in
2012 stood at only a third of the EU average ([1]). Sub-par productivity developments also reflect low expenditure on
research and development (R&D) and a low proportion of turnover from new
products out of the total turnover of enterprises ([2]). (See also Section 2.3). Wage developments have been relatively
contained, but compensation per employee expressed in purchasing power standard
(i.e. correcting for price differences across Member States) was around
80 % of the EU average in 2013, indicating that there is a misalignment
between productivity and wages.
 Graph 1.5:     Total factor productivity evolution, total economy 
 2000=100 EU-12 consists of BG, CZ, EE, CY, LV, LT, HU, MT, PL, RO, SI, and SK Source:  European Commission 
External position and trade
The net external balance has stabilised
at a moderate surplus, thus lending support to the sustainability of the
economy’s external position. Improvements in
external trade and increased capital inflows resulted in a significant upward
adjustment in the net external balance, which swung from a sizeable deficit
before the 2009 crisis to a surplus position. This development also reflected
the positive impact of rising employment on the savings of the economy, which
added to the subdued demand for capital imports on account of the slowdown in
investment. As a result, the net surplus balance of the international
investment position was reinforced. The very large stock positions that make up
the net balance, mainly on account of the financial sector, render the
sustainability of the external position vulnerable to interest rate shocks.
This risk is to some extent mitigated by the fact that the liabilities of the
large international banks operating from Malta are largely linked to their
assets.
Despite strong economic growth, Malta
has lost export market shares. Declines have mainly
been registered in goods exports, reflecting losses in both product and
geographical markets (see Graph 1.6). These developments to some extent also
reflect a slowdown in oil re-exports, which in the span of a few years grew to
represent a significant portion of Malta’s goods exports (over 30 % in
2011). Services exports, the main driver of the Maltese economy, also lost
market shares in 2013. Despite the improving external trade balance, these
developments may indicate that some sectors may be losing their competitive
edge. Indeed, unit labour costs have increased more dynamically than in
competitor countries, reflecting both higher domestic inflation and contained
labour-cost developments in the competitors.
 Graph 1.6:     Geographical and sectorial composition of nominal (USD) rate of change of exports of goods 
 Source: COMTRADE data (HS 1992 Commodity Classification), European Commission calculations 
International comparisons of Malta’s
competitiveness point to a number of areas for improvement. Malta’s overall competitiveness score, according to the World
Economic Forum’s Global Competitiveness Report, is close to the median for the
EU countries, suggesting that Malta has to some extent been successful in
overcoming the limitation imposed by the small size of the domestic market.
Besides market size, the main shortcomings identified by the report are
innovation (see Section 2.3) and the efficiency of the labour market (see
Section 2.4), even though these two categories registered gains in recent
years. The quality of institutions is also seen as a key impediment, as also
identified by the World Bank’s Doing Business report (see Section 2.3). 
 Graph 1.7:     Global competitiveness index, EU countries 
 Source: 2014-15 Global Competitiveness Report 
Public finance developments
Malta's budgetary performance over the
past decade has exhibited varying trends, with some expenditure overruns,
linked also to weaknesses in the budgetary framework at execution stage. In June 2013, some months after the abrogation of the previous
Excessive Deficit Procedure, Malta was put back in the procedure for the third
time since its accession to the EU. This reflected significant fiscal slippages
in 2012 and the failure to ensure a sufficient pace of debt reduction towards
the 60 %-of-GDP threshold in the Stability and Growth Pact. The absence of
a binding fiscal framework in the past undermined the credibility of the
government’s fiscal strategy and implied a short fiscal planning horizon. As a
result of a very weak fiscal framework and despite repeated commitments to
restraint current expenditure ([3]), slippages have occurred in the previous years, which have often
been partly offset by lower-than-planned public investments. This was coupled
with optimistic projections for economic growth and government revenue over the
past decade. In 2000-07, Malta had one of the highest forecast errors among EU
countries, while the projection errors have been smaller in countries where
forecasts are produced or scrutinized by independent bodies ([4]). Forecast errors have decreased since then and the trend reversed
in 2012-13, when current revenue outcomes turned out more positive than the
projections, which compensated for some overruns in expenditure.
 Graph 1.8:     Deficit, total revenue and expenditure (% of GDP) 
 Source:  European Commission 
Malta’s government finances do not
appear to face sustainability risks in the short term. The general government debt-to-GDP ratio increased to 69.5 %
in 2013, also on account of a debt-increasing stock-flow adjustment due to some
tax arrears from Enemalta (the public energy utility corporation). In 2014, the
debt ratio is projected to decrease to 68.6 % of GDP and to decrease further
in the following years, thanks also to favourable nominal GDP growth. However,
a comprehensive assessment of fiscal sustainability should be based on the
entire time horizon. Based on an overall assessment, the long-term
sustainability of Malta’s public finances faces substantially-increasing risks
in the medium and long term (see Section 2.1). 
Financial stability
While deposits continued to increase at
a robust pace, lending stagnated. Following a
period of stagnation in 2009-10, household deposits began growing at an
increasing pace thereafter reflecting also the improving labour-market
conditions. In 2014, household deposits increased by 10 %, a growth rate
significantly higher than the historical average. At the same time, lending has
been weak, particularly to firms, pointing to a mismatch between credit demand
and credit supply. This has resulted in an improving liquidity for the Maltese
banks (see Graph 1.9) and contributed to the significant
upward swing in the net external balance of the economy. According to the ECB’s
Bank Lending Survey, credit conditions improved in 2013 and the first half of
2014 on account of growing demand by small and medium enterprises (SMEs) and
households. High interest rates for corporate loans and tight credit standards,
however, continue to dampen demand for bank financing.
Aggregate financial soundness indicators
remain robust but asset quality is deteriorating.
The two leaders on the domestic retail market, Bank of Valletta and HSBC Malta,
cleared the thresholds set in the comprehensive asset quality review and stress
test by a comfortable margin, ahead of their joining the Single Supervisory
Mechanism. In aggregate, the core domestic banks — the part of the banking
sector whose main activity consists of servicing the domestic economy — are
profitable and have maintained their capital adequacy. Asset quality, however,
is deteriorating. On the one hand this points to difficulties in some sectors
of the economy in servicing their loans despite the relatively positive
macroeconomic environment. On the other, this could also indicate difficulties
banks face in working out or writing off bad loans, in particular in the
construction sector. Worsening asset quality also prevents banks from relaxing
their credit standards and playing a more active role in supporting growth.
Lending growth resumed in the second half of 2014, which may contribute to a
stabilising or even declining ratio of non-performing loans to gross loans.
Still high levels of corporate indebtedness, however, continue to limit the
demand for new debt financing and underscore the importance of maintaining
competitiveness to ensure that companies generate sufficient cash flows to
service their liabilities.
  Box 1.1: Economic surveillance process. The Commission’s Annual Growth Survey, adopted in November 2014, started the 2015 European Semester, proposing that the EU pursue an integrated approach to economic policy built around three main pillars: boosting investment, accelerating structural reforms and pursuing responsible growth-friendly fiscal consolidation. The Annual Growth Survey also presented the process of streamlining the European Semester to increase the effectiveness of economic policy coordination at the EU level through greater accountability and by encouraging greater ownership by all actors. This Country Report includes an assessment of progress towards the implementation of the 2014 Country-Specific Recommendations adopted by the Council in July 2014. The Country-Specific Recommendations for Malta concerned the achievement of a timely and durable correction of excessive deficit in line with Excessive Deficit Procedure Council recommendation, ensuring the long-term sustainability of public finances, improving the utilisation of human capital, diversifying energy sources and maintaining competitiveness through tackling shortcomings in the business environment. 
 Graph 1.9:     Banking sector exposure to Maltese residents 
 Note: Claims on residents include loans, debt securities and equity and other shares Source: Central Bank of Malta 
 Table 1.1:       MIP scoreboard indicators 
 Source: European Commission, Eurostat and DG ECFIN (for the indicators on the REER) 
 Table 1.2:       Key economic, financial and social indicators - Malta 
 Source: EUROSTAT, ECB, AMECO 
Taxation
Tax compliance and tax evasion represent
a long-standing challenge in Malta. Malta has
improved its budgetary situation over the last two years but still needs to
continue its consolidation efforts. The fight against tax evasion and strengthening
tax compliance assist the fiscal consolidation process thorough increasing tax
revenues and ensures a fair, effective and efficient tax collection system.
Malta displays a comparatively high level of undisputed tax debt as a
proportion of net revenue collections (ranked 5th in the EU) ([5]). The gross closing balance of tax arrears ([6]) stood at 25.9 % of GDP in 2013, of which 12.4 % and 7.7 %
of GDP respectively related to Value Added Tax (VAT) and income tax
arrears ([7]). Out of this
balance, around 5.5 % of GDP was considered as collectable, with
collectable VAT arrears representing only 0.7 % of GDP. Findings from a
recent study suggest that the VAT gap ([8]) is among the highest in the EU ([9]). Although no reliable estimates are available, a recent
survey ([10]), indicates
an important share of undeclared work in the Maltese economy ([11]). This may be driven by the prominence of 'sensitive sectors' such
as construction, personal and domestic services, tourism, trade, crafts and
catering, and by the high proportion of micro and small enterprises in
manufacturing sector as well as a high incidence of illegal immigration
(although recent increases in activity rates may partly reflect a decline in
informality).
Electronic payments can enhance tax
compliance but are still relatively underused in Malta. Electronic payments in Malta are below the EU average in per capita
terms (EUR 261 000 per capita compared with an EU average of EUR
483 000) ([12]) (see Graph 2.1.1) and there are also no limits on cash
payments in Malta. 
 Graph 2.1.1:   Electronic payments per capita (2013) 
 Source: European Central Bank 
Malta is largely compliant with the
guidelines issued by Organisation for Economic Cooperation and Development
(OECD) ([13]). In terms of corporate tax, Malta's tax rate is one of the highest
in the EU (35 %), but its full imputation tax system and associated
refunds can reduce the effective tax rate to 5 or 10 %. There are also
favourable regimes for intellectual property taxation, no withholding taxes on
outbound dividends, interests and royalties ([14]) to non-residents and limited anti-abuse. 
 Graph 2.1.2:   Taxes by function in % of GDP for the EU and Malta (2012) 
 Source: European Commission 
The Maltese authorities have taken a
series of steps to deliver a fair tax system by fighting tax fraud, evasion and
avoidance. One of the key measures involves merging
revenue departments into a single authority in order to integrate VAT and
income tax returns and streamline collection. This process is still ongoing
and, in the 2015 Budget, the Government announced that the IMF’s Fiscal
department’s specialists would be assisting with the ongoing merger of the tax
departments. Malta has introduced a number of measures to improve compliance
and recovery of amounts due including revisions to the penalties in its VAT
legislation and the interest on taxes due. The 2015 Budget also introduced the
requirement for everyone carrying out a commercial activity to be registered
for VAT purposes, regardless of annual turnover. Regarding electronic means of
payment, the 2015 Budget indicated that a Working Group will be set up to make
recommendations to the government on how to increase the use of electronic
payments at national level. It also announced the launch of a study to address
the limit on the amount of cash for a single transaction. With regard to
undeclared assets, Malta introduced a scheme (the Investment Registration
Scheme), which provided individuals and companies resident in Malta with the
opportunity to regularise their income tax position in relation to their
holdings of eligible assets derived from undeclared income ([15]). In order to increase powers to obtain information on undeclared
assets, Malta has recently signed a Multilateral Agreement on The Automatic
Exchange of Tax Information under the aegis of the Organisation for Economic
Cooperation and Development. With respect to the fight against undeclared work,
there is a lack of a single body in charge. Responsibilities of labour inspections
are dispersed across different bodies ([16]), each responsible for a specific domain (such as health and
safety, labour law and employment standards, tax evasion, and abuses to the
social benefit system).
Debt sustainability
The government debt ratio in Malta is
lower than the euro area average but it has risen continuously since 2008, reaching almost 70 % of GDP in 2013 ([17]), due also to a higher-than-expected stock-flow adjustment. The
debt is projected to have decreased to 68.6 % of GDP in 2014 according to
the Commission 2015 winter forecast and to continue on a downward path by
reaching 66.2 % of GDP in 2016. 
The high level of contingent liabilities
represents an additional risk for Malta’s government finances. Government-guaranteed debt in Malta is high, following a
substantial increase since the start of the crisis, from 11.5 % of GDP in
2008 to 15.8 % of GDP in 2013 (which would imply a total public guaranteed
debt of around 85.3 % of GDP in 2013). The bulk of these guarantees, more
than 60 %, is accounted for by the energy sector in Malta. Hence, the
current difficult financial situation of Enemalta, the energy provider,
represents a challenge for government finances and it reflects the company’s
long-standing exposure to fluctuations in oil prices in combination with a lack
of timely and cost-effective adjustment in electricity tariffs and inefficiency
costs. The government has embarked on a large-scale energy reform plan (see
Section 2.2), an essential part of which is the restructuring of Enemalta’s
debt.
Debt sustainability in the short term
has benefited from efficient debt management.
Spreads on Maltese sovereign bonds have not been significantly affected by the
tensions generated by the sovereign-debt crisis. In spite of an increase in the
debt ratio (around 7 percentage points. between 2007 and 2013), the apparent
cost of debt (interest expenditure over total nominal debt) decreased to
4.2 % in 2013 (from 5.4 % over the period 2004-08). The maturity
structure of government debt has been significantly lengthened since Malta’s
accession to the EU. The proportion of debt with long-term maturity has
increased to 94.8 % in 2013 from 79.2 % in 2003 while short-term debt
has decreased significantly (5.2 % of total government debt in 2013 from
20.8 % in 2003). This is expected to further reduce the impact of
fluctuations in the interest rate on government in case of changes in market
sentiment. In addition, government debt is almost entirely held by residents,
with non-residents accounting for just 3 % of the outstanding debt stock.
This has further protected sovereign debt against the tensions on international
markets. However, the high interconnectedness between the government sector and
the domestic economy, in particular the financial sector and households,
implies that adverse developments in one of these sectors can have negative
spillovers on the others.  
Although some improvement in the outlook
is expected, long-term sustainability of public finances remains a challenge. While Malta does not appear to face sustainability risks in the
short term, these risks increase in the medium and long term, due to the
budgetary impact of population ageing, in view also of the high increase of the
total dependency ratio (see Graph 2.1.4). In particular, over the next 20
years, a large fiscal adjustment would be required to ensure medium-term
sustainability in Malta. The risk increases when taking a longer-term view due
to the budgetary impact of population ageing, namely in the areas of pensions
and health care policies. New long-term projections of pension and healthcare
costs are currently being prepared ([18]) and will be published in the first half of 2015. It is expected
that, in the revised projections, Malta’s position with respect to long-term
sustainability will improve marginally, mainly due to a better demographic
outlook and improved macroeconomic assumptions ([19]).Malta has not fully implemented the fiscal plans in the latest
stability programme, which would help decrease the risk. These results are
confirmed by a debt sustainability analysis, which shows that the debt declines
below the 60 %-of-GDP if Stability and Growth Pact fiscal rules are
complied with or if the fiscal measures planned in the stability programme are
fully implemented. On the contrary, the debt would increase above 70 % of
GDP in case of a structural primary balance that gradually reverts to its
historical average, highlighting the importance of fiscal consolidation to
bring the government debt onto a sustainable path in the medium term (see Graph
2.1.3).
 Graph 2.1.3:   Gross government debt as % of GDP 
 Source: European Commission 
The Maltese pension system is confronted
with the challenge of safeguarding the long-term sustainability of public
finances while ensuring the provision of adequate retirement incomes. The Maltese public pension scheme is composed of a universal
defined-benefit contributory pension, complemented by a means-tested minimum
pension covering people with insufficient entitlements. The statutory
pensionable age is being raised gradually for both women and men from 62
currently to 65 by 2027, but this progression is very slow and no further measures,
such as linking the pensionable age with life expectancy, have been foreseen.
While helpful, the current measures to improve the activity rates of older
workers and females are not sufficient to ensure the long-term sustainability
of the pension system. 
With respect to current adequacy, Malta
scores only slightly worse on average in terms of poverty prevention compared
to the rest of the EU, but significant coverage gaps exist. The defined-benefit contributory pension (the so called ‘Two Thirds
Pension’) is capped at a relatively low level, while the minimum pension
currently stands at two thirds of the national minimum wage (four fifths for
married couples). The relative income ratio of people aged 65+ compared to the
working-age population is 0.79 ([20]) while the share of older people that are at risk of poverty or
social exclusion (20.8 % in 2013) is 2.5 percentage points higher than for
the EU average (yet lower than for the working-age population, at 22.5 %).
These averages mask important differences, however, as women in particular
experience significantly lower pension coverage than men: the gap for
non-coverage in pensions between women and men is at 36.5 percentage points
(vs. 6.8 percentage points for the EU). This is because, notwithstanding recent
progress, Maltese women continue to have the shortest employment careers in the
EU (23.7 years compared to an EU average of 32.2 years) as well as the lowest
employment rate in old age (18.7 % compared to an EU average of 43.3 %).
Because of insufficient contribution periods, women are often not entitled to
their own contributory old-age benefits and depend on their spouses’ pensions
or survivors’ benefits. 
 Graph 2.1.4:   Total dependency ratio ((0-14 plus 65+)/(15-64)) 
 Source: European Commission, The 2015 Ageing Report: Underlying Assumptions and Projection Methodologies 
The build-up of complementary pension
rights is being promoted with the introduction of third-pillar voluntary
pensions, while a framework for establishing occupational pensions is still
lacking. In order to encourage the provision of
adequate retirement income, the government is introducing a ‘Third Pillar’
pension scheme whereby fiscal incentives are to be tied to private pension
products offered by local banks and other financial institutions. In terms of
adequacy, this initiative goes in the right direction of promoting the build-up
of supplementary pension entitlements, which would grant higher replacement
complementing the pension income provided by the public scheme. The coverage of
these voluntary supplementary pensions will have to be closely monitored to
assess its effectiveness in delivering higher retirement incomes in the future,
including for lower income earners with a reduced propensity to save. No
measures have been taken so far to develop a framework for second-pillar
occupational pensions, which could provide more uniform coverage of the labour
force.
Measures to improve pension adequacy and
sustainability rely mostly on increasing labour market participation and
redemption of missing contributions, but implementation is advancing slowly. In 2013, a National Strategic Policy for Active Ageing was launched
to increase the activity rates of older workers, promoting longer working lives
and reducing the gap between the effective and statutory retirement ages.
Financial incentives have been introduced to encourage workers to remain in
employment past the pensionable age and encourage employers to recruit older
workers. Finally, for individuals approaching retirement but who do not have
enough credited contributions to be eligible for the National minimum pension,
the possibility of redeeming up to five years of contributions has been
introduced to allow them to then qualify for the minimum pension upon
retirement.
Due to population ageing, Malta records
one of the highest projected increases in public health expenditure in the EU. Public health expenditure increases are also attributed to Malta’s
reliance on secondary and tertiary care and to the rapidly growing cost of
medicines and surgical material, which has doubled in the last 10 years.
Current inefficiencies and shortcomings in cost-effectiveness of the health
system threaten its long-term sustainability. While general practitioners act
as gatekeepers to specialist and hospital care, the system is often bypassed as
patients have direct access to specialists in the private sector, leading to
the private sector accounting for 70 % of primary health-care contacts.
The health system also suffers from poor coordination between the public and
private sectors, with negative impacts on effectiveness and efficiency gains. 
The National Health Systems Strategy
(2014-2020) was adopted in July 2014 and its implementation is starting. Malta is making efforts to contain costs by improving the
governance of the system through the introduction of various internal control
mechanisms and the implementation of financial governance. Improvements in
procurement and distribution processes for medicines and medical devices have
led to substantial savings. Furthermore, a pay per use system on high costs
devices has reduced the holding of stock. Moreover, Malta has set up a health
system performance assessment framework that would allow the regular and timely
monitoring of a selected number of performance indicators. The government is
continuing its efforts of restructuring health service provision with an
emphasis on health promotion and disease prevention and primary health care.
Investments in primary healthcare are being made, together with further
recruitment of general practitioners and the offering of a broader scope of
services at primary level. Besides this, the authorities have embarked on an
investment programme for public primary healthcare: capital expenditure has
been increased, a refurbishment programme for health centres has started and
the screening and radiological capacities are being upgraded. Moreover, a
number of services which were previously offered in the secondary care setting
have been transferred to the primary health care sector. The government has
also taken measures to strengthen the interaction between the public and
private primary care provision. It is too early to assess the effects of these measures
on the overall health system efficiency, and their implementation in 2015 needs
careful monitoring to assess whether they are sufficiently ambitious to
increase efficiency and compensate for the demographic and other internal and
external pressures, and to ensure the long term sustainability of public health
expenditure.
The demand for long-term care has
increased as a result of population ageing as well as the reduced role of
extended family and an increased labour market participation of women. An insufficient supply of long-term care has been shown to lead to
situations where acute hospital beds are taken up inappropriately.
Community-based care is still underdeveloped. The Lack of formal long-term care
services may hinder progress in improving labour market participation of women,
especially at older ages, as informal family care plays an important role in
Maltese society and most informal caregivers are females aged between 40-59
(see Section 2.4). A number of initiatives have been undertaken to increase the
availability of residential care and encourage independent living. In recent
years, the government expanded residential care places and community-based
services, including day care centres and has also set up contracts with private
homes for the provision of services. While elderly residents in state homes
contribute 60 % of their total income ([21]), private institutions are not affordable for many pensioners.
Support measures offered to informal carers (usually family members) include a
combination of cash benefits (which include the carer’s allowance and the
carer’s pension) and care leave (which can be granted to public employees as
‘responsibility leave’ and up to a maximum of eight years over the person’s
whole career). Finally, a number of initiatives have been undertaken to
encourage independent living in order to enable elderly people to manage
without care, or with far less care, and reduce demand pressures. 
Fiscal framework
In July 2014, the Maltese Parliament
adopted the Fiscal Responsibility Act, with a view to transposing the
requirements of the Directive 85/2011/EU on budgetary frameworks and the Fiscal
Compact. The Fiscal Responsibility Act introduced a
balanced-budget rule in structural terms and a debt rule whereby, if the
debt-to-GDP ratio exceeds 60 %, the differential with respect to the
reference value should be reduced at the three-year average rate of 1/20 per
year as set out in the revised Stability and Growth Pact. The Act also
established the introduction of a three-year rolling budgetary framework
(National Medium-Term Fiscal Plan) which should enhance the predictability of
the budgetary planning. In addition, the Act provided for the establishment of
a Fiscal Council charged among others with endorsing the government’s official
macroeconomic and fiscal forecasts as well as ex-ante and ex-post monitoring of
the respect of fiscal rules. The members of the Fiscal Council were appointed
in January 2015. It is important that the functioning of the Council is fully
operationalised without delay among others by setting up of a permanent bureau
supporting the members in the execution of their duties.
Despite the approval of the Fiscal
Responsibility Act, the budgetary process in Malta is not yet aligned with the
European calendar. In particular, Malta is
non-compliant with the information requirements specified in the Regulation
(EU) No 473/2013, since in the last two years the Draft Budgetary Plan
presented on 15 October did not provide sufficient details on the discretionary
measures underpinning the budgetary targets. Malta is also in breach of the
requirement of the Regulation obliging the euro area Member States to make
public their draft annual budgets by 15 October every year. Both in 2013 and
2014, draft budgets containing all the necessary details for the concrete
implementation of the planned measures were only presented in November ([22]). 
While the Maltese economy as a whole
performs close to the EU average in terms of energy and carbon intensity, parts
of it perform worse. The energy intensity of the
economy (see Graph 2.2.1) reflects its structure, namely the
absence of heavy industry activities, a higher focus on services and a more
energy-efficient manufacturing sector, while the more energy-efficient
households reflect Malta’s geographical location. Nevertheless, key sectors
such as energy and transport have very low energy efficiency, reflecting a
number of structural features, which puts pressure on the competitiveness of
the economy. Moreover, the carbon intensity of the energy sector
(greenhouse-gas emissions per EUR 1,000) is among the highest in the EU,
reflecting the poor environmental performance of the existing power generation
capacities, leading to additional negative externalities for the economy.
 Graph 2.2.1:   Energy intensity of the economy 
 This indicator is the ratio between the gross inland consumption of energy and the gross domestic product (GDP) for a given calendar year. It measures the energy consumption of an economy. Source: European Commission 
Energy
The energy system is characterised by
its near-full reliance on imported oil. Apart from
a very marginal share of energy produced from renewable sources, electricity
production on the island has been entirely dependent on imported heavy fuel
oil. Besides putting pressure on the external trade balance, this, combined
with inefficiencies in electricity generation and distribution (see Graph 2.2.2), has resulted in high electricity
prices for end-consumers and discontent among consumers. ([23]) Political interventions led to tariff deficits (namely electricity
tariffs not covering the costs of power production), resulting in the
accumulation of a large debts by the state-owned power utility company
Enemalta. 
 Graph 2.2.2:   The inefficiencies of Malta's electricity system, 2013 
 Distribution losses: distribution losses divided by total net electricity production. Efficiency of transformation: transformation output divided by transformation input. Source: European Commission calculations 
The authorities have launched a comprehensive
reform of the sector. The electricity
interconnector with Italy has been completed and is expected to start operating
in the first half of 2015, including the commercial use of the optical fibres
of the link. The interconnector is expected to help ensure the security of
electricity supply by putting an end to Malta’s situation as an energy island.
In addition, a new gas-fired power plant and an existing power plant, converted
to work with gas, are expected to be operational by the end of 2016. These
projects are to be financed through public-private partnerships. These changes
would effectively put an end to Malta’s exclusive dependence on oil, although
they will not remove its dependence on imported energy sources. Combined with
planned investment in the distribution and transmission networks, the
authorities would be able to discontinue operations in the older and less
efficient plants at Marsa and Delimara I, resulting in a more efficient and
less polluting energy system. 
Electricity tariffs were reduced. The authorities frontloaded the potentially positive impacts of
these changes on Enemalta’s costs and reduced households’ electricity tariffs
significantly in 2014, while businesses are expected to benefit from a
reduction in 2015. Decreases in production and distribution costs in the
future, as a result of a more efficient infrastructure and access to
potentially cheaper energy via the interconnector, are expected to offset the
impact of these reductions on the company’s revenues. Delays in the ongoing
projects, however, would put pressure on Enemalta’s profitability in the
meantime. The company’s still-high debt stock suggests that its financial
performance will continue to require close monitoring. Going forward, the
expected increase in the proportion of energy provided by renewable sources may
exert an upward pressure on electricity production costs in case of domestic
production, in case renewables are not promoted in a cost-inefficient manner.
Well-designed support schemes providing sufficient incentives for investment
but avoiding overcompensation are key. The use of cooperation mechanisms
provides additional avenues for exploration.
Challenges remain in the areas of
renewable energy and energy efficiency. Updated
Eurostat figures show that Malta has made some progress on promoting the use of
renewable energy sources (2.5 % of the energy consumed in 2013 came from
renewable energy sources), making use of grant schemes, feed in tariffs and net
metering to promote the use of photovoltaic installations. The authorities also
supported the use of domestic solar heaters and the use of renewables in
transport. Moreover, Enemalta is planning to launch a number of renewable
energy pilot projects focusing primarily on photovoltaic land systems, including
the installation of solar car parks where solar panels are installed on
canopies built over parking bays, thereby using the limited space in the
densely populated, urban environments of the Maltese islands. Even so,
achieving the 2020 renewable energy target, namely a share of 10% final energy
consumption, solely by increasing domestic production seems challenging in view
of the serious geographical constraints i.e. the lack of space for large-scale
installations. Nevertheless, developing renewable-energy capacities would be
instrumental in lowering the import dependency of Malta’s energy system.
Although primary and final energy consumption decreased in 2005-2012, Malta is
not on track to meet its 2020 national energy efficiency target for final
energy consumption. 
Transport
Significant traffic congestion and low
efficiency in the transport sector entail high environmental and economic
costs. Compared to the EU average, urban peak-hour
congestion in Malta ([24]) (see Graph 2.2.3) constitutes a major problem,
reflecting the significant number of cars in use ([25]), including a notable proportion of older and inefficient vehicles,
and the prevalent lack of alternatives to transport with private cars
aggravates the problem. The latter also renders transport the largest
greenhouse-gas-emitting sector in Malta, outside of the scope of the Emissions
Trading Scheme. The costs of congestion appear significant relative to other
transport externalities (See Table 2.2.1). Considering the islands’ insularity
and the fact that road is the dominant mode for internal transport, a more
efficient use of existing road infrastructure through promoting sustainable,
collective public transport systems and dissuading the use of private vehicles
is key. Road infrastructure presents an additional challenge, particularly with
respect to road quality, while the limited size of the islands constrains the
room for further expansion of the network ([26]). 
 Table 2.2.1:     External costs of transport in Malta, 2012 
 Source: Study on the External Cost of Passenger and Commercial Vehicles in Malta, University of Malta, forthcoming 
 Graph 2.2.3:   Ratio of average speed to free-flow speed (roads with free-flow speed<=50km/h) 
 Source: European Commission 
The authorities have launched a new
reform of the public transport. After a failed
privatisation attempt, leading to temporary re-nationalisation, the public
transport service is once again operated by a private company as of January
2015. The new provider will need to overcome the concerns over the quality and
financial sustainability of the service, which led to the 2014
re-nationalisation in order to encourage a higher take-up of the service and
thus a viable alternative to private transport.
The authorities have introduced
incentive schemes to make the use of cars more sustainable and are investing in
upgrading infrastructure. Measures include a
minimum level of biofuels in petroleum fuels, a differentiated car registration
tax, a car scrapping scheme and continued financial support for electric,
hybrid and vehicles using liquefied petroleum gas. These will help
diversification and decrease dependency on fuel imports. However, they are
insufficiently ambitious when judged against the scale of the challenge. The
national transport policy also aims at a more efficient use of the road
network, through more public transport and intelligent transport systems. This
should also provide more convenient routes for commercial and private vehicles
that bypass urban centres and, in doing so, will alleviate congestion on urban
roads caused by heavy longer distance traffic. Transport infrastructure
projects feature prominently in the list of key investment projects that the
authorities have identified in the context of the Investment Plan for Europe.
Given the severity of the challenges,
key issues remain to be adequately addressed. Malta
has made no substantial progress on promoting alternative modes of transport
(e.g. more intensive use of collective public transport, including land and sea
public transport, bicycles, including electric ones, scooters) in an efficient
way with a view to tackling traffic congestion. Moreover, little has been
achieved as regards energy efficiency in the transport sector, which suffers
from complete dependence on imported fossil fuel and also low energy (fuel)
efficiency and hence contributes significantly to greenhouse-gas emissions and
air pollution in Malta.
Inefficiencies in the public
administration and the business environment hamper Malta’s growth potential and
attractiveness to investors. The majority of
foreign investors present in Malta find the country attractive for foreign
investment. The main pull factors are considered to be the stability of the
social climate and the corporate taxation regime, followed by the political, legal
and regulatory environment, the skill level of the labour force and the labour
costs ([27]). The strong
economic performance, however, masks important inefficiencies. The World Bank’s
Doing Business report highlighted the judicial system as a key shortcoming in
Malta’s business environment, affecting the speed of resolving insolvency, the
rights of creditors in providing finance and the enforcement of contracts in
general (see Graph 2.3.1). Moreover, the efficiency of the
public administration is hampered by cumbersome procedures, including in the
area of public procurement. Bureaucracy, alongside access to finance and the
innovation capacity, have emerged as key impediments to doing business in the
World Economic Forum’s Global Competitiveness Report (see Graph 2.3.2). Some of these emerged only in recent
years, as the economy evolved, and are likely to be key factors inhibiting
growth in the near future.
 Graph 2.3.1:   Distance to euro-area average (frontier = 100) 
 Source: World Bank, 2015 Doing Business report 
 Graph 2.3.2:   The most problematic factors for doing business (% of responses) 
 Source: World Economic Forum, Global Competitiveness Report 
Public administration
Administrative simplification
Inefficient government bureaucracy is a
significant impediment to doing business in Malta. A
significant proportion of companies highlighted inefficient bureaucracy as the
most problematic factor when doing business on the island ([28]). The government had put a 25 % reduction goal of the
administrative burden in its election manifesto and the Commissioner for
simplification is tasked with achieving this objective during the current
legislature. The authorities have issued a string of initiatives, from meeting
stakeholders to identifying specific burden reduction measures, a recent
‘Repeal’s day’, on which the abolishment of a number of laws and regulations
was announced, and the adoption of the ‘one-in-one-out’ principle. Concerning
simplification, the “SME test” was implemented in January 2015 and therefore an
assessment of its effectiveness is not possible yet. In terms of a better
streamlining of procedures to obtain operating licenses for businesses, a
reform of the Malta Environmental Planning Agency has been initiated with a
view to turn it into a one-stop-shop for licensesby the end of 2015. As this
process is ongoing, its further progress needs to be closely monitored as
regards its effects on shortening licensing procedures.
Public procurement
The average duration of public
procurement procedures has declined significantly.
While quick public procurement procedures may not be optimal as they may
compromise on quality, excessively long procedures may result in inefficient
allocation of resources. The length of procurement procedures is determined by
a number of factors, such as the size and the subject matter of the particular
contract and it is also affected by burdensome administrative procedures.
Action taken by the authorities, in particular the – introduction of
e-procurement (e-notification, e-access and e-submission), which is now applied
for all projects over the EU thresholds has produced the expected results in
terms of reduction of the duration of the procedures. The reform also had a
positive impact on private sector interest with the number of registered
economic operators increasing nearly three-fold over the course of 2013,
suggesting that competition has increased, which can be expected to contribute
to a better value-for-money for the government. Even though no quantitative
target was set, the average duration remains somewhat above EU average (87
days). The additional measures announced for 2015 (in particular the
recruitment of 11 additional civil servants and the introduction of a
"tracking system") are expected to consolidate the achievements and
reduce the duration a bit further.
Functioning of the internal market
Administrative inefficiencies hamper the
proper functioning of the internal market in Malta.
The Annual Growth Survey highlighted the need to ensure that consumers across
the EU are able to benefit from an integrated single market, while being able
to rely on effective enforcement of consumer rights. Failure to enforce these
principles can have negative consequences on consumer demand and, thereby, on
growth. In spite of some progress towards eliminating discriminatory pricing in
the transport and utilities sectors, such practices towards non-Maltese
nationals remain in place in some sectors. As regards fostering competition,
one of the key challenges for Malta still remains the need to strengthen the
implementation and enforcement of competition law, namely through a bigger and
more effective role and sufficient resources for the Competition Authority.
Although some additional human resources have been made available, they are
still insufficient. 
Access to finance
A number of factors hinder firms’ access
to finance. The cost of financing in Malta remains
high relative to the euro area for both small and large corporate loans (see
Graph 2.3.3). As in other Member States, the
corporate sector in Malta is predominantly constituted by SMEs (99.8 % in
2012). However, in the specific case of Malta, 95 % of SMEs are in reality
micro-enterprises, a larger percentage that the EU average. SME financing in
Malta is predominantly provided by the banking sector through loans. Recent
studies indicate that whereas small, medium and large enterprises have good
access to credit through the banking system, micro enterprises face significant
difficulties in access to credit. Lack of collateral and limited financial
literacy, combined with the small value of potential transactions seem to
contribute to micro-enterprises' difficulties in accessing finance. On the
other hand, equity financing, particularly for seed, early stage and growth
funding through market operators are almost non-existent. Important gaps exist
therefore regarding access to finance by the corporate sector, particularly in
the case of micro-enterprises and prospective entrepreneurs. Indeed, prevalence
of debt financing in the economy results high corporate leverage (ratio of debt
to company equity), which pushes up the risk profile of borrowers and increases
borrowing costs. Alternative sources of financing are relatively underdeveloped
or are in early stages of development. Concerning access to seed capital,
substantial progress seems to have been achieved with the introduction of the
Seed Investment Programme. Moreover, the authorities announced intentions to
introduce a scheme to incentivise equity investments in start-ups by amending the
tax law to provide tax credits equivalent to investment up to a maximum of EUR
250,000. The measure is planned to be introduced by the end of 2015. The
setting up of a development bank is also being considered. The idea is still in
a nascent stage, however, and the authorities have yet to announce details
about their intentions. 
 Graph 2.3.3:   Spread of corporate interest rates in Malta and the euro area 
 Source: European Central Bank 
Research and innovation
In spite of significant progress over
the last few years, several structural challenges continue to hamper Malta’s
knowledge-driven growth potential as a very small open economy. These include very low R&D intensity (0.85 % of GDP in
2013, still some distance from the 2020 target of 2 % of GDP) with limited
public spending (0.39 % of GDP), which positions Malta as 26th in the EU,
a weak human resources base in science and technology ([29]), low levels of scientific excellence linked to the lack of
critical mass in specific research areas ([30]), and declining innovation-based business performance ([31]). Many of Malta’s key relative scientific and technological
strengths depend on the build-up of capacity in these areas ([32]). Over the past decade (2004-13), the innovative performance of the
business enterprise sector deteriorated significantly, with patent performance
far below the EU average ([33]), and heavily shrinking licence and patent revenues from
abroad ([34]). The Global
Competitiveness Report identified the insufficient capacity to innovate as one
of the most problematic factors in doing business in Malta and, thus, one of
the key challenges the country’s competitiveness. Tackling these issues
requires a comprehensive effort to tune the framework conditions to better
stimulate the emergence of cooperation between publicly-funded research
organisations and businesses. 
The authorities have launched a Research
and Innovation strategy and are working on an implementation action plan. The Research and Innovation strategy was adopted in 2014,
identifying seven thematic specialisation areas, while the action plan is
expected to be finalised by mid-2015. In addition, Malta deploys particular
efforts in the immediate and sustainable implementation of the new Innovation
Strategy for Smart Specialisation, which contains tailor-made measures
(i.e. actions, tools, platforms or incentives), to develop the Maltese R&I
ecosystem in seven selected areas ([35]). Moreover, the country's priorities go towards: a) systemic
evaluations of SME support; b) assessments of universities and public research
organisations based on their performance, with a view to allocate some funding
on the basis of excellence; and c) stimulating the transfer of knowledge
between science and businesses. Malta offers tax incentives in the form of
R&D tax credits, which target industrial projects to develop innovative
products and solutions.
Justice reforms
The efficiency of the justice system
continues to demonstrate shortcomings. The time
needed to resolve civil, commercial and administrative cases in first instance
courts remains the highest in the EU ([36]) and has worsened in 2012-13. The rate of resolving administrative
cases was the lowest in the EU in 2013 ([37]). The World Bank’s Doing Business report also indicates
shortcomings in insolvency procedures, which were estimated in this survey to
take up to three years in 2013 and 2014. The tools in place to evaluate the
judicial system are limited, since there is no regular evaluation system nor
performance and quality indicators of courts' activities and Malta has not yet
carried out surveys among court users and legal professionals. As regards
training, Malta is one of the few EU Member States where there is currently no
compulsory pre-service or in-service training for judges. Alternative Dispute
resolution Methods and Mediation are still underused in Malta despite efforts
to promote mediation (by the Mediation Centre). 
The Justice Reform Commission, which was
set up in March 2013, handed the government its final report on the reform of
the sector on 2 December 2013. Concrete measures
started to be implemented in 2014, aiming to substantially improve the
efficiency and quality of the judicial system. The main measures concern
extending the buildings policy, improving human resources in Court ([38]) and providing better services to citizens ([39]). In addition, in 2014, an independent Agency was created, with the
double function of providing professional and high quality legal aid services
and regulating all the relevant legal aid issues.
Labour market
The Maltese labour market still features
very low activity rates and important labour market challenges persist. The gap in total activity compared to EU average is high. After
four consecutive years of growth exceeding the euro-area average, the Maltese
economy continued expanding at a robust rate in the first half of 2014 (see
Section 1). Against this background, the unemployment rate has fallen below 6 %,
youth unemployment below 11 %, the share of long-term unemployed over
total unemployment remains stable. While the active population continues
growing steadily, overall labour market participation is still low due to low
activity rates of women and older workers. People with disabilities are not
well integrated in the labour market, and while youth unemployment is low,
integrating the inactive and non-registered young people remains important.
 Graph 2.4.1:   Main labour market indicators 
 Note: Activity and long-term unemployment rates for 2014 refer to the average over the first three quarters Source: European Commission 
In spite of the gains recorded over the
past years, labour-market participation continues to be among the lowest in the
EU. Although the latest demographic projections
depict a less worrisome scenario compared to previous estimates (thanks in
particular to higher fertility rates and positive net migration), the
working-age population is still forecast to decline between 2014 and 2030 and
the old-age dependency ratio to increase considerably ([40]).             Labour market activity in Malta improved considerably
over the past decade (see Graph 2.4.2), particularly reflecting remarkable
gains achieved in female participation (see Graph 2.4.3). Nevertheless, while the activity
rate of men is close to 85 % (well above the EU average), female activity
and employment rates, at around 50 %, are among the lowest in Europe, and
are particularly low for women above 40 years. Similarly for old-age
employment, average working life duration is increasing but remains well below
the EU average, with a striking gap for women where the figures report a
distance of 8.5 years to the EU average ([41]). In addition, despite the overall low unemployment rate,
activation support through active labour market policies is limited.
 Graph 2.4.2:   Trends in total activity rates in selected countries 
 Note: Age 20-64 Source: European Commission 
 Graph 2.4.3:   Female activity rates by age group, 2003-2013 
 Note: Data for age group 60-64 in 2003 is unreliable Source:  European Commission 
Women’s and older workers’
participation in the labour market
The still unsatisfactory outcomes on
labour market participation reflect a combination of factors. More generally, these include care obligations, benefit design and
insufficient flexible work arrangements, notably in the private sector. The
employability of older workers and the length of the working life have
implications for the adequacy of pensions and the long-term sustainability of
the pension system (see also Section 2.1). Among the
reasons for the very low female employment there are family obligations related
to care of dependants, but financial disincentives may also play a role. The
culture of long working hours and the limited availability of flexible and
reduced-hours opportunities deter women from participating in the labour market
and limit men in sharing family obligations. Malta has one of the highest
shares of women in the EU that report "other family or personal
responsibilities" as a reason for being inactive on the labour
market ([42]). After
giving birth, more women retain current jobs in medium-to high skills
occupations, while women with lower qualifications face high risks of labour
market detachment ([43]). Finally,
Malta's activation support through active labour market policies is also
limited.
Policy efforts by the authorities focused
on promoting the reconciliation of work and family life. They have gone in the right direction as evidenced by the positive
developments in labour market participation rates. The measures focus mainly on
financial incentives to make employment more attractive to further stimulate
employment and limit the extent of current inactivity traps which are
considerable at the lower incomes (See Graph 2.4.4). The continuation of the provision of
free childcare services to households in which both parents are in employment
or pursuing further education, the introduction of tapering of social
assistance benefits and the planned reforms to the maternity benefit system, as
well as putting in place tax incentives and wage subsidies for inactive women
above the age of 40 who enter the labour market are examples. 
 Flexible working arrangements have been
introduced in the public sector, while their take up in the private sector is
still limited, owing also to its composition as the majority of business
entities are SMEs and microenterprises ([44]). Planned measures include putting in place a toolkit to support
private employers in the implementation of flexible work and family-friendly
measures ([45]) on a
case-by-case basis. Preliminary assessment gives positive indications in terms
of increasing female participation in the labour market and improving
work-family balance. Although there are already measures aiming at labour
market integration of women having childcare obligations, attention to those
having other dependants is still lacking. To support employment and reduce
disincentives to work for single parents on social assistance, the tapering of
benefits will be extended in 2015 for this target group, but the system is
expected to be changed so as to increase smooth transitions from social
assistance to employment. To address inactivity traps and to improve the
situation of low-income households, an in-work benefit scheme is planned to be
introduced in 2015 targeting low-to-medium income families where both spouses
(or single parent) are in employment and have dependent children up to 23 years
of age.
 Graph 2.4.4:   Inactivity traps for low-wage earners, % of gross earnings, 2013 
 Note: The inactivity trap is defined as the percentage of gross earnings that is taxed away when moving from inactivity to employment, due to taxes and withdrawal of benefits. Earnings levels at 40%, 50% and 67% of the average wage, assuming full-time work. The 40% level corresponds to the minimum wage. Source: European Commission-OECD Tax and Benefit database 
Several measures aimed at increasing the
employment rate of older workers are being implemented. These focus on raising the effective retirement age and enabling
workers to continue in working beyond the statutory pensionable age. The
National Strategic Policy on Active Ageing for the years 2014-2020, based on
three pillars: increasing active participation in the labour market, enhancing
participation in society and promoting independent living, was launched in November
2013 and an Active Ageing Unit was set up for the policy implementation.
Besides gradually increasing in the statutory retirement age, tax incentives
aimed at attracting older workers to the labour market have been set up, both
in the form tax deductions for older employees, as well as tax incentives for
enterprises to recruit and train older workers. 
Youth and people with disabilities
Youth unemployment and the employment of
persons with disabilities present additional challenges. Although concerns about these two groups are less acute, they also
show vulnerabilities. The self-reported employment rate of persons with
disabilities in Malta is very low, standing at 21.4 % ([46]) for those aged 20-64 in 2012 compared to the EU average of 48 %.
The employment gap with respect to people without disabilities is also
significant (at 43 percentage points against 23.6 percentage points for the EU
average) and it has significantly widened since 2009. A benefit trap may
contribute to this problem. Persons with disabilities are entitled to a
disability pension equivalent to around 55 % of the minimum wage, which is
fully subject to means-test, implying a one-to-one reduction in the disability
pension for labour incomes above the minimum wage. As regards young people, the
youth unemployment rate is lower than the EU average, but the deviation between
the youth and adult unemployment ratios is among the highest in the EU.
The authorities have put in place
targeted measures to support the implementation of these groups into the labour
market. To support the integration of people with
disabilities into the labour market, the government introduced a law whereby 2 %
of persons employed by companies (employing more than 20 employees) must be
persons with disabilities. Future policy plans focus around the new National
Policy on the Rights of Persons with Disabilities, launched in December 2014.
To address benefit traps, disability pensions will be reformed with a view to
keeping entitlements even if undertaking gainful employment. As regards young
people, the implementation of the Youth Guarantee focuses on the inclusion of
inactive, non-registered youths that are not in education, employment or
training, balancing adequately preventive and remedial action. 
Wage bargaining
The wage bargaining framework has helped
containing wage developments, but some institutional features call for
monitoring. Malta has a decentralised collective
bargaining framework, which has proved stable and effective in providing a high
degree of flexibility. Increases in the statutory minimum wage are limited to
the increase in the Cost of Living Allowance, an automatic wage indexation
mechanism providing (partial) compensation for past inflation ([47]). The same absolute increase is also granted to all wage earners in
the economy and is calculated on the basis of a ‘base wage’, which is only
about 60 % of the average wage. This means that the Cost-of-Living
Allowance is significant for those receiving less than the average wage, but
its impact would be smaller for the higher-paid workers. Given the currently
very subdued price developments, wage increases linked to the granting of
Cost-of-Living Allowances have been modest (EUR 0.58 per week in 2015). Albeit
partial, however, wage indexation could still exert potentially negative
effects on competitiveness by causing a misalignment between wage and
productivity developments, in particular in the case of a surge in inflation
due to external factors. Further in the same vein, the extent to which the
Cost-of-Living Allowance is incorporated in the collectively-agreed wage
increases also affects the potential for misalignment between wage and
productivity developments. No steps have been taken to limit such possible
risks.
Social Policies
Malta seems to be moving away from its
2020 poverty-reduction target. The share of persons
at risk of poverty and social exclusion is lower than
the EU average, but it has increased by four percentage
points between 2008 and 2013 reaching 24 %, while severe material deprivation
more than doubled (see Graph 2.4.5) over the same period despite the
favourable economic and labour market conditions. The
share of persons at risk of poverty and social exclusion is higher than the EU average for children (32 % vs 27.6 %), in particular for those living in single-parent households (41.9 % vs 31.8 %). Poverty among the elderly is also higher than EU average
(20.8 % vs 18.3 %), and is closely related to low
pension adequacy. Risk of poverty or social exclusion is also significantly
higher for persons with only basic educational attainment (ISCED 0-2), with the
ratio standing at 18 % as
opposed to only 3 % for
persons with tertiary education. 
In order to improve efficiency and
effectiveness of the social protection system in preventing and reducing
poverty, Malta has announced several reforms.
Although starting from low levels of social expenditure, Malta has registered
progress with a considerable increase in expenditure in child day care,
education and, to a lesser extent, for activation measures ([48]). Moreover, a strategic Framework for Poverty Reduction and for
Social Inclusion, setting out policy to reduce poverty and social exclusion,
was launched in December 2014. The efforts to support employment and reduce
disincentives to work are expected to further contribute to reduce the share of
population at risk of poverty.
 Graph 2.4.5:   Poverty indicators, % of total population 
 Note: AROPE - At risk of poverty or social exclusion, AROP - At risk of poverty Source: European Commission 
Education and Skills
The skills levels of the workforce will
not be improved in the long-term without addressing the bottlenecks of the
education system. Despite significant investments
in recent years, Malta still faces challenges related to basic skills
attainment, the early-school-leaving rate (see Graph 2.4.6) and adjustment of skill to the
labour-market requirements. Higher educational attainment also improves the
labour market participation and employability of workers. In 2014, the
government received a Country-Specific Recommendation to that effect.
 Graph 2.4.6:   Trends in the rate of early school leaving, % 
 Source: European Commission 
Education outcome and early-school
leaving 
International studies show that basic
skills attainment is rather poor. The performance
of 15-year olds in the OECD Programme for International Student Assessment
2009+ tests was among the worst in the EU ([49]). This was coupled with the largest gender gap among EU countries,
with girls strongly outperforming boys in all tested fields (reading,
mathematics and science). Similarly, the performance of 10-year olds’ in the
2011 Progress in International Reading Literacy Study and Trends in
International Mathematics and Science Study ([50]) was very weak, with Malta being the worst performer among EU
countries in most fields. 
Despite the improvement in recent years
and the putting in place of targeted policies to tackle it, early-school
leaving remains a major problem for the education system. The
early-school-leaving rate fell by 12 percentage points between 2007 and 2013.
Despite this recent progress, the rate is still the second highest in the EU
(20.8 % in 2013), with a
significant gender gap (23.2 % for males compared with 18.4 % for females). The authorities’ efforts to tackle the issue have
been in the right direction. The Early School Leaving Strategy ([51]) was published in June 2014 and an Early-School-Leaving monitoring
system has been established at the end of the year. An Early-School-Leaving
Monitoring Unit within the Ministry of Education and Employment has been set up
and an inter-ministerial committee to steer and coordinate policy actions on
early school leaving started its work in July 2014. Moreover, efforts are being
made to provide quality second chance education for target groups, i.e. persons
with disability. Proper implementation of the National Literacy Strategy for
All ([52]), launched in June 2014, supported with adequate funding, may help
address literacy problems. The overall purpose of the strategic framework is to
promote and enhance high quality literacy practices among children, youths,
adults, third-country nationals and persons with learning difficulties, as well
as to improve literacy outcomes. The current basic skills programmes will be
consolidated and extended further in order to make them more effective. 
Further progress reducing early school
leaving, as well as in basic skills attainment, will strongly depend on quality
of teaching ([53]). As some major changes have been going on in the school sector in
Malta (e.g. the introduction of mixed ability classes, benchmarking examination
and e-learning tools), a lack of sufficiently qualified and skilled teachers
can be a bottleneck in promoting student-centred learning. Both the Early
School Leaving Strategy and the Literacy Strategy acknowledge the need for
improving professional development of teachers at all career stages. So far,
the main envisaged measure is setting up an Institute for continuous
professional development of teachers in 2015. As measures to improve quality of
teaching necessarily require a medium- to long-term policy perspective,
enduring commitment in the coming years will be key. 
Providing labour market skills
The supply of skills has not yet
adjusted to the labour-market requirements.
Bottlenecks have been identified across the entire skills spectrum ([54]). Due to the small size of the economy, there is the structural
challenge for employers to recruit specialised profiles with relevant work
experience. Among the highly skilled sectors, health care, finance and IT stand
out as those where demand considerably exceeds supply. Maltese employers have
resorted to recruit skilled workers from abroad, but foreign labour tends to be
more difficult to retain. Moreover, despite increased take-up of vocational
education and training ([55]), there
remains scope for strengthening the governance and partnerships between
providers and employers. Malta has not yet developed an integrated information
system, collecting systematic data on vacancies across the whole economy, nor a
clear framework for monitoring and skills anticipation ([56]). Still-limited participation in lifelong learning ([57]) also constrains the employability of
Maltese residents, in particular among the low skilled workers ([58]) and among older workers, whose skills are often out-dated and
employability is at stake. 
The authorities’ approach in this area
is multifaceted but policies are in early stages of implementation. After consultation with social partners,
the Government is in the process of creating a single national apprenticeship
scheme. The scheme will cover a larger number of qualification levels
and occupations and also includes a system of tax deductions introduced by the
2014 budget ([59]). More
vocational courses are being introduced, covering additional subjects, and the
number of apprenticeships has gone up in order to meet the high demand. Moreover, the National Commission for Further and Higher Education
is aiming to introduce a national system for validation of informal and
non-formal learning, aligning with the Malta Qualifications Framework. Malta also
plans to set up a Skills Council to better align educational outcomes with
labour market relevance ([60]) while a ‘virtual labour market’ is meant to facilitate the
matching of skills with work placements. As regards lifelong learning, the
authorities have designed a Lifelong Learning Strategy with a view to increase
participation and have set aside dedicated funding for employers to train their
employees through the European Social Fund Operational Programme 2014-2020. The
policy response seems to go in the right direction. The involvement of
enterprises in the design of more attractive and higher quality apprenticeships
still seems to be insufficient and so far demand for apprenticeships exceeds
supply.
 2014 commitments || Summary assessment 
 Country-specific recommendations (CSRs)([1]) 
 CSR 1: Correct the excessive deficit in a sustainable manner by 2014. In 2015, significantly strengthen the budgetary strategy to ensure the required structural adjustment of 0.6 % of GDP towards the medium-term objective. Thereafter, pursue a structural adjustment of at least 0.5 % of GDP each year, and more in good economic conditions or if needed to ensure that the debt rule is met in order to keep the general government debt ratio on a sustained downward path. Finalise the adoption of the Fiscal Responsibility Act with a view to putting in place a binding, rule-based multiannual fiscal framework and establishing an independent institution charged with the monitoring of fiscal rules and endorsing macroeconomic forecasts underpinning fiscal planning.     Continue improving tax compliance and fighting tax evasion by ensuring the continued roll-out and evaluation of measures taken so far, while taking additional action, in particular by promoting the use of electronic means of payment.   || Malta has made substantial progress in addressing CSR 1 (this overall assessment of CSR 1 excludes an assessment of compliance with the Stability and Growth Pact).         Malta fully addressed the recommendation on the the fiscal framework. In July 2014, the Maltese parliament adopted the Fiscal Responsibility Act. It envisages the establishment of a Fiscal Council that would endorse the macroeconomic and fiscal projections prepared by the Ministry of Finance. In the first year following the adoption of the Act, its functions are carried out by the National Audit Office. The Fiscal Council has been formally appointed on 16 January 2015. Malta has made some progress in strengthening tax compliance and fighting tax evasion, but the tangible impacts of ongoing measures are not yet clear. Recent steps are proceeding in the right direction, but the pace of change could be accelerated, notably for the merger of tax departments. The first efforts to explore the promotion of electronic payment systems are encouraging, but as yet are restricted to the payment of taxes.   
 CSR 2: To ensure the long-term sustainability of public finances continue the ongoing pension reform, such as by accelerating the already enacted increase in the statutory retirement age and by consecutively linking it to changes in life expectancy. Ensure that a comprehensive reform of the public health system delivers a cost-effective and sustainable use of available resources, such as strengthening primary care.   || Malta has made limited progress in addressing CSR 2: Malta has made no progress on the pensions system reform to accelerate the increase in the statutory retirement age and consequently linking it to changes in life expectancy.   Malta has made some progress in improving the cost-effectiveness of its health system. The authorities reacted positively to the recommendations and increased their effort towards reform with some measures already giving positive results. The National Health Systems Strategy and subsequent action plans on the Maltese health system provide a sound basis for a comprehensive reform. To ensure sustainability of the health system it is important that the extensive measures which have been planned and initiated in governance, health promotion and disease prevention and primary care continue to be implemented with the same momentum. 
 CSR 3:   Continue policy efforts to address the labour-market relevance of education and training by stepping up efforts on the reform of the apprenticeship system.     Further improve basic skills attainment and reduce early school leaving, in particular by finalising and implementing the announced national literacy strategy.           Further improve the labour-market participation of women, in particular those wishing to re-enter the labour market by promoting flexible working arrangements. || Malta has made some progress in addressing CSR 3: Some progress in creating a single apprenticeship scheme has been done. A new Apprenticeship Unit has been created within the Malta College of Arts, Science and Technology as a single body responsible for the apprenticeship scheme. Further efforts are necessary in order to facilitate a prompt match of skills with the employers' needs.   Malta has made some progress on measures to further improve basic skills attainment and reduce early school leaving. The National Literacy Strategy for All was launched in June 2014. The Early School Leaving Strategy was published in June 2014. An Early School Leaving Monitoring Unit within the Ministry of Education and Employment has been set up and an inter-ministerial committee to steer and coordinate policy actions on early school leaving started its work in July 2014.   Some progress in addressing the female labour market participation through favouring work-family balance is visible. Some steps to introduce flexible working arrangements in the private sector have been taken and measures targeting women with childcare obligations are being introduced. Improving participation of older women, both in terms of facilitating retention and reintegration into the labour market, as well as in terms of skills adjustments, needs further attention. Although some measures are being implemented, such as tax incentives and wage subsidies to inactive women above 40 who enter the labour market, their impact on employment needs to be further monitored. Limited attention has been given to measures for women who have other dependents such as elderly or people with disabilities. Overall, a positive result in terms of increasing female participation in the labour market and improving work-family balance is observed. 
 CSR 4: Diversify the energy mix in the economy, including by increasing the share of energy produced from renewable sources. || Malta has made some progress on diversifying the energy mix by completing the construction of the electricity interconnector to mainland Europe and taking first steps to shift electricity production away from oil as well as on measures to increase energy efficiency 
 CSR 5:   Continue efforts to increase the efficiency and reduce the length of public procurement procedures;           encourage alternatives to debt-financing of companies through facilitating access to capital markets and developing venture capital funds;       and increase the efficiency of the judicial system by ensuring a timely and efficient implementation of the planned judicial reform.   || Malta has made some progress in addressing CSR 5: Malta has made substantial progress on measures concerning public procurement procedures. The actual length of procurement procedures has dropped significantly from 191 days in 2013 (233 days in 2009) to 115 days in 2014. This reduction results notably from the introduction of mandatory e-procurement (e-notification, e-access and e-submission) since January 2013. In addition, the relevant government departments have been strengthened. The announced additional administrative capacity increase should consolidate the gains and reduce the duration of the procedure a bit further, thereby bringing Malta closer to the EU average. Malta has made some progress on measures to encourage alternatives to debt-financing of companies. A review of the start-up scheme by Malta Enterprise in ongoing. The authorities have launched a venture capital platform to help start-ups and announced the Seed Investment Programme (to provide tax credits equivalent to investment made in start-ups).  Malta has made limited progress on measures to increase the efficiency of the Maltese judicial system which remains a challenge. Judicial reforms are planned but most of them are not yet implemented. They could be expected to produce positive effects in the medium and long term but this remains to be confirmed by the facts on the ground.  
 Europe 2020 (national targets and progress) 
 Policy field target || Progress achieved 
 National employment target (70 %) || 66.1 % (first nine months of 2014), 64.8 % (2013) – the old national target was reached, and progress was made towards reaching the new 2020 target. 
 National target for expenditure on research & development (2 % of GDP) || Malta’s R&D intensity stood at 0.85 % of GDP in 2013, very low compared to the EU average of 2.02 %, while the 2020 national target of 2 % is far from being met. 
 National target for reducing greenhouse-gas emissions falling under sectors outside the scope of the Emissions Trading Scheme (+5 % compared to 2005 level) || Non-ETS greenhouse gas emissions decreased by 4% between 2005 and 2013. According to the latest national projections and taking into account existing measures, the target is expected to be achieved: +4 % in 2020 compared to 2005 (with a margin of 1 percentage points). 
 Renewable energy target (10 %) || 2.5 % share of renewable energy in 2013 (EurObserv'ER) 
 National energy efficiency target (reducing primary energy consumption to 0.825 Mtoe and final consumption to 0.493 Mtoe) || Malta’s 2020 energy efficiency target was lowered from 0.8 Mtoe to 0.7 Mtoe expressed in primary energy consumption (0.5 Mtoe expressed in final energy consumption). When comparing the trend of primary energy consumption with the GDP development over the past decades, it can be seen that there is evidence of a strong decoupling of both since 2005.   
 National early-school-leaving target (10 %) || 22.7 % in 2011, 21.1 % in 2012, 20.8 % in 2013. Some progress towards achieving the target. 
 National target for tertiary-education attainment (33 %) || 23.4 % in 2011, 24.9 % in 2012, 26 % in 2013. Some progress towards achieving the target. 
 National poverty target (lifting 6,560 individuals from the risk of poverty or social exclusion) || Malta committed to reduce by 6,560 the number of people at risk of poverty and social exclusion from the 2008 figure of 81,000. However, those at risk of poverty and social inclusion have continued to increase and in 2013, the figure stood at 99,000. 
 Table AB.1:     Macroeconomic indicators 
 (1) The output gap constitutes the gap between the actual and potential gross domestic product at 2010 market prices. (2) The indicator of domestic demand includes stocks. (3) Unemployed persons are all those who were not employed, had actively sought work and were ready to begin working immediately or within two weeks. The labour force is the total number of people employed and unemployed. The unemployment rate covers the age group 15-74. Source: European Commission 2015 winter forecast; European Commission calculations 
 Table AB.2:     Financial market indicators 
 (1) Latest data November 2014. (2) Latest data Q2 2014. (3) Domestic banks dealing only with residents. (4) Latest data September 2014. (5) Latest data June 2014. Monetary authorities, monetary and financial institutions are not included. * Measured in basis points. Source: IMF (financial soundness indicators); European Commission (long-term interest rates); World Bank (gross external debt); ECB (all other indicators). 
 Table AB.3:     Taxation indicators 
 (1) Tax revenues are broken down by economic function, i.e. according to whether taxes are raised on consumption, labour or capital. See European Commission (2014), Taxation trends in the European Union, for a more detailed explanation. (2) This category comprises taxes on energy, transport and pollution and resources included in taxes on consumption and capital. (3) VAT efficiency is measured via the VAT revenue ratio. It is defined as the ratio between the actual VAT revenue collected and the revenue that would be raised if VAT was applied at the standard rate to all final (domestic) consumption expenditures, which is an imperfect measure of the theoretical pure VAT base. A low ratio can indicate a reduction of the tax base due to large exemptions or the application of reduced rates to a wide range of goods and services (‘policy gap’) or a failure to collect all tax due to e.g. fraud (‘collection gap’). It should be noted that the relative scale of cross-border shopping (including trade in financial services) compared to domestic consumption also influences the value of the ratio, notably for smaller economies. For a more detailed discussion, see European Commission (2012), Tax Reforms in EU Member States, and OECD (2014), Consumption tax trends. Source: European Commission 
 Table AB.4:     Labour market indicators 
 (1) Unemployed persons are all those who were not employed, but had actively sought work and were ready to begin working immediately or within two weeks. The labour force is the total number of people employed and unemployed. Data on the unemployment rate of 2014 includes the last release by Eurostat in early February 2015. (2) Long-term unemployed are persons who have been unemployed for at least 12 months. Source: For expenditure for social protection benefits ESSPROS; for social inclusion EU-SILC 
 Table AB.5:     Product market performance and policy indicators 
 (1) Labour productivity is defined as gross value added (in constant prices) divided by the number of persons employed. (2) Patent data refer to applications to the European Patent Office (EPO). They are counted according to the year in which they were filed at the EPO. They are broken down according to the inventor’s place of residence, using fractional counting if multiple inventors or IPC classes are provided to avoid double counting. (3) The methodologies, including the assumptions, for this indicator are presented in detail here:  HYPERLINK "http://www.doingbusiness.org/methodology" . (4) Index: 0 = not regulated; 6 = most regulated. The methodologies of the OECD product market regulation indicators are presented in detail here: HYPERLINK "http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm" (5) Aggregate OECD indicators of regulation in energy, transport and communications. Source: European Commission; World Bank — Doing Business (for enforcing contracts and time to start a business); OECD (for the product market regulation indicators) 
 Table AB.6:     Social indicators 
 (1) People at risk of poverty or social exclusion: individuals who are at risk of poverty and/or suffering from severe material deprivation and/or living in households with zero or very low work intensity. (2) At-risk-of-poverty rate: proportion of people with an equivalised disposable income below 60 % of the national equivalised median income. (3) Proportion of people who experience at least four of the following forms of deprivation: not being able to afford to i) pay their rent or utility bills, ii) keep their home adequately warm, iii) face unexpected expenses, iv) eat meat, fish or a protein equivalent every second day, v) enjoy a week of holiday away from home once a year, vi) have a car, vii) have a washing machine, viii) have a colour TV, or ix) have a telephone. (4) People living in households with very low work intensity: proportion of people aged 0-59 living in households where the adults (excluding dependent children) worked less than 20 % of their total work-time potential in the previous 12 months. (5) For EE, CY, MT, SI and SK, thresholds in nominal values in euros; harmonised index of consumer prices (HICP) = 100 in 2006 (2007 survey refers to 2006 incomes) (6) 2014 data refer to the average of the first three quarters. Source: For expenditure for social protection benefits ESSPROS; for social inclusion EU-SILC. 
 Table AB.7:     Green growth 
 Country-specific notes: 2013 is not included in the table due to lack of data. General explanation of the table items: All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2000 prices)           Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR)           Carbon intensity: Greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR)           Resource intensity: Domestic material consumption (in kg) divided by GDP (in EUR)           Waste intensity: waste (in kg) divided by GDP (in EUR) Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP  Energy weight in HICP: the proportion of "energy" items in the consumption basket used for the construction of the HICP Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual % change) Environmental taxes over labour or total taxes: from DG TAXUD’s database ‘Taxation trends in the European Union’ Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2005 EUR) Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP Electricity and gas prices for medium-sized industrial users: consumption band 500–2000MWh and 10000–100000 GJ; figures excl. VAT. Recycling rate of municipal waste: ratio of recycled municipal waste to total municipal waste Public R&D for energy or for the environment: government spending on R&D (GBAORD) for these categories as % of GDP Proportion of GHG emissions covered by ETS: based on greenhouse gas emissions (excl LULUCF) as reported by Member States to the European Environment Agency Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transport industry gross value added (in 2005 EUR) Transport carbon intensity: greenhouse gas emissions in transport activity divided by gross value added of the transport sector Energy import dependency: net energy imports divided by gross inland energy consumption incl. consumption of international bunker fuels Diversification of oil import sources: Herfindahl index (HHI), calculated as the sum of the squared market shares of countries of origin Diversification of the energy mix: Herfindahl index over natural gas, total petrol products, nuclear heat, renewable energies and solid fuels Renewable energy share of energy mix: %-share of gross inland energy consumption, expressed in tonne oil equivalents * European Commission and European Environment Agency ** For 2007 average of S1 & S2 for DE, HR, LU, NL, FI, SE & UK. Other countries only have S2. *** For 2007 average of S1 & S2 for HR, IT, NL, FI, SE & UK. Other countries only have S2. Source: European Commission unless indicated otherwise; European Commission calculations 
([1])  Labour productivity per hour worked in
2012, expressed in purchasing power standard. Source: Eurostat.
([2])  Turnover from innovation represented
7.4 % of total turnover in Malta in 2010, compared to an EU average of
13.4 %.
([3])  In particular, slippages seem to have
been frequent in current expenditure, namely public wages, intermediate
consumption and subsidies.
([4])  Source: European Central Bank Monthly
Bulletin, Feb 2013.
([5])  OECD, Tax Administration 2013.
([6])  National Audit Office, ‘Report by the
Auditor General on the Public Accounts 2013’.
([7])  This is an increase compared to 2012: the
gross closing balance of arrears in 2012 was 21.7 % of GDP, of which VAT
and income tax arrears were 9.7 % and 7.3 % of GDP respectively.
([8])  The difference between the amount of
VAT actually collected and the amount that is theoretically collectable based
on the VAT legislation.
([9])  The latest figures involve a large
upward revision due to a correction for the calculation of gambling exports
(which are VAT exempt, but for which input VAT is not recoverable). All Member
States were involved in the process of compiling this report and reviewing the
results prior to publication. However, the Ministry for Finance is currently
re-examining the data and methodology in advance of the next edition of the
report due in 2015. The study is available at: http://ec.europa.eu/taxation_customs/resources/documents/common/publications/studies/vat_gap2012.pdf

([10]) Eurobarometer survey, ‘Undeclared Work
in the EU’, March 2014.
([11]) Comparatively high percentages of
survey respondents said they had purchased undeclared goods or services in the
past year and that they were employed without a formal written contract.
([12]) Source: European Central Bank. Figures
cover credit transfers, direct debits and card payments.
([13]) Tax transparency 2014 : Report on
Progress, OECD – Global Forum on Transparency and Exchange of Information for
Tax Purposes http://www.oecd.org/tax/transparency/GFannualreport2014.pdf
([14]) This is the case for interest and
royalties if the non-resident is not effectively connected with a permanent
establishment.
([15]) The scheme attracted
a total of 1 469 valid
registrations covering an aggregate of EUR 455.8 million worth of eligible
assets.
([16]) The Department of Industrial and
Employment Relations, the Occupational Health and Safety Authority, the Inland
Revenue, and the Employment and Training Corporation.
([17]) Failure to ensure a sufficient pace of
debt reduction towards the 60 %-of-GDP threshold in the Stability and
Growth Pact was a key reason for reopening of an Excessive Deficit Procedure
against Malta in June 2013. The European Council requested that Malta achieve a
nominal budget deficit of 2.7 % of GDP by 2014, which corresponds to a
cumulative improvement in the structural balance of 1.4 percentage points. of
GDP in 2013 and 2014, while also ensuring that the gross debt ratio declines at
a satisfactory pace. After correction of the excessive deficit, the Council
recommended that Malta pursue the structural adjustment effort at an
appropriate pace so as to reach the medium-term objective (MTO) of a balanced
budget in structural terms by 2019.
([18]) Updated long-term projections of the
cost of ageing components will be based on the latest demographic projections
released by Eurostat (EUROPOP 2013).
([19]) See the 2015 Ageing Report: underlying
assumptions and projection methodologies,
http://ec.europa.eu/economy_finance/publications/european_economy/2014/pdf/ee8_en.pdf
([20]) Compared to an EU average of 0.93.
([21]) Provided they are not left with less
than EUR 1 400 per year.
([22]) See http://ec.europa.eu/economy_finance/economic_governance/sgp/budgetary_plans/index_en.htm
([23]) The World Economic Forum’s 2013-14
Global Competitiveness Report ranks the perception of the quality of
electricity supply in Malta 69th among 148 countries and 26th
among the EU Member States.
([24]) Although not accurately reflecting
whether a road is urban or not, the free flow speed can be a good proxy as
regards its type and characteristics, free flow speeds below 50 km/h being a
good proxy for urban roads.
([25]) On average,
each driving licence holder owned 1.4 cars in Malta in 2012 and private cars
were used for 71 % of all
trips made by individuals.
([26]) While the perception of the quality of
port (ranked 20 in the 2014-15 Global Competitiveness Report) and air transport
infrastructure (rank 30) are good, the quality of roads is lagging behind (rank
85).
([27]) Source: Ernst & Young’s 2014 Malta
attractiveness survey
([28]) 2014-15 Global Competitiveness Report
([29]) Malta has only 0.21 new doctoral
graduates per thousand population aged 25-34, compared to the EU average of 1.81,
and a low performance (less than half the EU average) on new graduates in
science and engineering. 
([30]) The average performance of Malta as
measured by the fraction of its scientific publications within the 10 %
most cited publications worldwide was 4.8 % in 2009 compared to an EU
average of 10.98 %, and with a declining trend from 2005 to 2009.  
([31]) Malta's score in the Innovation Output
Indicator (23.3) is less than half of the EU average (47.8) and it is 22nd in
the Innovation Union Scoreboard 2014. 
([32]) The share of jobs in knowledge
intensive activities (17 % of total employment aged 15-61 compared to 13.9 %
EU average) is higher than the EU average.
([33]) Malta has 0.7 PCT patent applications
per billion GDP in current PPS (EUR) in 2010 (EU average: 3.9). 
([34]) Licence and patent revenues from abroad
have fallen from 0.78 % of GDP in 2005 to 0.21 % of GDP in 2012. 
([35]) Tourism product development, maritime
services, aviation and aerospace, healthy living and active ageing, and
e-health, resource-efficient buildings, high value-added manufacturing, and
aquaculture. 
([36]) The time needed to resolve litigious
civil and commercial cases in first instance courts fell from 849 days in 2010
to 685 days in 2012 and then rose to 750 days in 2013. Malta remains the
country with the longest lenght of proceedings in this category. For
administrative cases the length of proceedings dropped, from 2 758 days in
2010 to 1 457 in 2012 then rose to 2 036 days in 2013. The length of
proceedings for administrative cases is the highest in the EU. Source: European
Commission, The 2015 EU Justice Scoreboard.
([37]) The rate of resolving administrative
cases stood at 40 % in 2012 and in 2013. Source: European Commission, The
2015 EU Justice Scoreboard.
([38]) Recruitment of ‘jurists’ (assistant
judges) is planned for 2015.
([39]) The following have been implemented or
are planned: frontline assistance bureau to help citizens, ICT developments
allowing claims to be submitted online, online payment of court fees and a
better flow of information on case progression.
([40]) According to EUROPOP2013 projections,
the population aged 15-64 is bound to decrease by more than 4 % between
2014 and 2030, while the ratio between the population aged 65+ and 15-64 is
expected to rise from 26.4 % to 40.5 %, one of the largest increases
in the EU.
([41]) The average duration of working life
stood at 31.6 years in 2012 (increasing by 3.3 years from 2008) compared to an
average of 35 years in EU. For women, is was 23.7 in 2012, compared to 32.2 for
the EU.
([42]) While inactivity due to childcare or
care of incapacitated adult is reported by women in 17.2 % (below the EU28
of 18.4 %), 40 % inactivity is reported due to other family or
personal responsibilities (12 % in EU28), EUROSTAT 
([43]) Malta: the National Employment policy
2014, p 77 ff.
([44]) Under a project of the Malta Business
Bureau, Supporting Human resources In Family-friendly Training, a toolkit to
support private employers in the implementation of flexible work and
family-friendly measures will be delivered and advisory services on the
implementation of flexible working arrangements are planned to be provided on
case-by-case basis.
([45]) Project of the Malta Business Bureau: Supporting
Human resources In Family-friendly Training.
([46]) Source: EU-SILC 2012. EU-SILC is based
on different methodology than the Labour Force Survey, and thus these two
surveys are not comparable.
([47]) The statutory minimum wage, which
amounted to EUR 165.68 per week in 2014, has been adjusted marginally in 2015
by the Cost of Living Allowance to EUR 166.27 per week.
([48]) Employment and Social Developments in
Europe 2014 [http://europa.eu/rapid/press-release_IP-15-3321_en.htm
([49]) http://www.oecd.org/pisa/keyfindings/pisa2009keyfi
ndings.htm. Malta did not participate in PISA 2012.
([50]) http://timssandpirls.bc.edu/.
([51]) Ministry for Education and Employment
(2014), A strategic plan for the prevention of early school leaving in Malta, http://education.gov.mt/ESL/Documents/School%20Leaving%20in%20Malta.pdf.
([52]) Ministry of Education and Employment
(2014), A national literacy strategy for all in Malta and Gozo
2014-2019, http://education.gov.mt/en/Documents/Literacy/ENGLISH.pdf.
([53]) See European Commission (2012),
Supporting the Teaching Professions for Better Learning Outcomes, SWD (2012)
374.
([54]) Mapping and analysing bottleneck
vacancies on EU labour markets, 2013.
([55]) According to national information 75 %
of graduates are finding full-time employment after completion of
apprenticeship.
([56]) Coverage of vacancies by the Maltese
PES is only partial.
([57]) Participation stands at 7.5 % in
Malta vs. 10.5 % in EU28.
([58]) Malta is among the MS with a high share
of workforce (25-29) having low qualifications (ISCED 0-2).
([59]) Ministry for Finance (2013), Budget
Speech 2014, https://mfin.gov.mt/en/TheBudget/Documents/The_Budget_2014/Budget2014_Speech_EN.pdf
([60]) Malta: The National Employment Policy,
May 2014.